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If Del. Cos. Confer Differential Voting Rights, Must Do So in Certificate of Incorporation

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By Michael Greene

Jan. 23 — The Delaware Chancery Court Jan. 22 ruled that a plaintiff director established a colorable claim for a preliminary injunction because differential voting rights were included in the company's bylaws and not its certificate of incorporation.

Vice Chancellor J. Travis Laster opined that Delaware General Corporation Law § 141(b) “does not authorize a provision conferring differential voting rights on directors to appear in the bylaws; it must appear in the certificate of incorporation.” He added that “[u]nder Section 109(b), a bylaw that conflicts with the DGCL is void.”

The court, however, denied the plaintiff's motion for an expedited hearing because he had not established a sufficient probability of irreparable harm.

Disproportionate Voting Powers

To document their business relationship, the three stockholders entered into a joint venture agreement, which provided that in the event of a deadlock between the eight board members, evenly split by nominees of Semperit and Sri Tang, the tiebreaking vote shall be allocated to a chairman elected out of the four Semperit directors.

The provisions designating the chairman and granting the casting vote were included in the company's bylaws, but not its certificate of incorporation.

Several years later, a deadlock occurred that required the chairman to exercise the casting vote.

After the resolution, the plaintiff, a Sri Tang director, filed a lawsuit seeking to invalidate the two bylaws that conferred the voting powers, and also a declaratory judgment to invalidate the resolution adopted by the defendants.

The plaintiff additionally moved to schedule an expedited hearing on the preliminary injunction request.

Two-Part Test

Because the plaintiff asked for an expedited hearing on a preliminary injunction, he found that the appropriate analytical framework was the two-part test created by the court in Giammargo v. Snapple Beverage Corp., which requires the plaintiff to establish a sufficiently “colorable claim” and show a sufficient possibility of a threatened “irreparable harm.”

Colorable Claim

All of the plaintiff's claims turned on whether the company's bylaws can confer greater voting power on a particular director or group of directors.

The court found that the plaintiff had established a colorable claim on all of his counts because under §109(b) a bylaw must comport with the DGCL and § 141(b) requires differential voting rights to appear in the certificate of incorporation.

Irreparable Harm

The court, however, held that the plaintiff had not established a sufficient possibility of irreparable harm.

However, the court still found that good cause existed for a “speedy hearing” in the form of a two-day trial on the merits in approximately 90-120 days.

Accordingly, the plaintiff's motion was granted in part and denied in part.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

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